Reasons behind China’s big Investments in Sri Lanka

What’s China doing in Sri Lanka? Officially, it’s building the country’s infrastructure. Like the ports of Colombo and Hambantota, which have left the country heavily indebted.

Unofficially, China is setting up outposts in the Indian Ocean as part of Beijing’s broader strategy to secure the passage of Middle East oil through the Strait of Malacca and counter American naval hegemony in the region.

China has increasingly come to rely on the Middle East for its oil needs, which must be shipped through the Strait of Malacca to reach its shores. This means that Beijing runs the risk of being cut off from Middle East oil supplies should America blockade the Strait in the event of a further escalation of South China Sea disputes or an outright war between America and China.

 “In the event of war with the United States—over Taiwan, for example—Chinese policy planners have long feared a retaliatory US naval blockade of the Strait of Malacca to cut off vital oil supplies,” says Nilanthi  Samaranayake. “In a 2003 speech, President Hu Jintao even acknowledged China’s vulnerability in the Strait. Thus, some American security analysts have argued that the People’s Republic of China (PRC) has been actively constructing a “string of pearls in the Indian Ocean Region (IOR) to secure the safe passage of oil by Chinese ships, as well as to position China as a countervailing presence to US naval hegemony in the Sea Lines of Communications (SLOCs).”

That could explain why Chinese submarines  have begun suddenly and repeatedly showing up in the Chinese-operated South Container Terminal in the port of Colombo.

 And why China has been telling India to stay off Sri Lanka.

That’s something investors in Southeast Asian markets should keep a wary eye on, as it opens yet another front between the two Asian giants, which could drag in America.

And that raises the geopolitical risk of investing in the region. Though Chinese and Indian markets seem to be ignoring these risks, for now.

China’s And India’s Equities

Index/Fund

12-month Performance

5-year Performance

iShares India (INDY)

21.92%

34.18%

IShares China (FXI)

18.90

7.90

(Forbes)

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